Option Investor
Newsletter

Daily Newsletter, Monday, 7/17/2017

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Eagerly Awaiting Earnings

by Thomas Hughes

Click here to email Thomas Hughes

Introduction

The market held steady today, trading in a range so tight it barely made a blip on the radar. Earnings season has started and this week begins to heat up. Today's action shows a market in wait-and-see mode, ready to move in either direction depending on how results come in. There are a total of 68 S&P 500 and 9 Dow components reporting so we should get a fairly decent read on which way the wind is blowing. To date, 5 sectors are beating expectations led by the Financials.

Asian markets were mixed despite better than expected GDP from China. China reported 6.9% growth for the 2nd quarter, edging up from the first quarter, but did not calm fears spurred by financial regulators. Headlines from a policy meeting have led investors to believe tighter regulation and a slow down in financial innovation was on the way. Korea led with a gain of 0.43%, the Shang Hai Composite lagged with a loss near -1.40%. Europen indices fared little better as the second round of Brexit negotiation begins. The FTSE led with a gain of 0.35%, the DAX lagged with a loss of -0.35%.

Market Statistics

Futures trading was near perfectly flat this morning. The SPX was indicated to open with gains in the range of -1 to 1 point and that held steady throughout the early morning. The open was calm, the indices opened with small losses and quickly established the day's bottom. By 9:45 the indices were bouncing higher. Volume was low and action was weak, intraday top was hit below Friday's highs and held the remainder of the day. Late afternoon trading saw the indices fall back to the bottom of the daily range where support began to reassert itself. Support held leading the indices to close near the middle of their respective opening levels.

Economic Calendar

The Economy

Only one report today and it was OK. The Empire State Manufacturing Survey shows the manufactuing sector is still growing but that growth has slowed. The headline number came in at 9.8 for July, down from last month's 19.8 and well below the expected 13. Within the report all components remain positive although they are also all showing reduced activity. New Orders came in at 13.3, shipments at 10.5 and employment at 3.9. Hours worked was the weakest coming in at an even 0.0.


Moody's Survey of Business Confidence took a dive this week, shedding 2.7% to hit 30.5. This is the lowest level for more than 6 months. Mr. Zandi points out that while this is a bit surprising one data point does not make a trend and there is some expectation for correction following the many weeks of strong reports we've had. The four week moving average of confidence remains high and consistent with optimistic business conditions. The caveat is that it will only take another week of lower numbers for the average to start making a dip.


Earnings season has begun and will heat up this week. There are 68 S&P and 9 Dow Components reporting which makes it one of the busier weeks. To date 6% of the S&P 500 has reported with 80% beating EPS estimates and 83% beating revenue estimates. The blended rate of earnings growth for the quarter is now 6.8%, up 0.3% from last week, and is expected to continue rising.


Looking forward earnings growth is expected to continue into the next 6 quarters at least with the caveat that those expectations have been in decline. The largest contributor to declining estimates is the energy sector which at one point was expected to post growth in excess of 450% for all of 2017. With oil prices down -15% from their 2017 highs a drop in forward outlook was expected, the sector is now projected to post growth closer to 150% for the year.


The Dollar Index

The Dollar Index fell to new 10 month lows as FOMC rate hike expectations continue to decline. Janet Yellen assured us last week another hike was a definite possibility this year, the problem is that the data and specifically the inflation data does not support it. Meanwhile EU economics continue to improve and support the euro adding downward pressure to the dollar. The index is now sitting on the $95 level with indicators in support of lower prices. This level may become support, it is coincident with support levels set last year, and a break below it will be bearish. There is not much data to move the dollar this week but there is an FOMC policy decision next week, that might do it.


The Gold Index

With political risk largely evaporated from the market the gold/dollar correlation is working a little better now. Spot prices for gold rose another 0.5% on weak dollar today, moving up to begin testing the $1,235 resistance level. This level has been important many times over the past year or so and a likely trigger point for new trades. A break above this level will be bullish with upside target near $1,250.

The Gold Miners continue to wrestle with resistance even while gold prices begin to rise. The Gold Miners ETF GDX closed with a small gain but price action created a small red bodied candle with long upper shadow in confirmation of resistance. Resistance is the short term moving average and the $22 level. The indicators are bullish in the near term, both are pointing higher, but short to long term both remain consistent with range bound trading and are not indicative of strong movement in either direction. The narrowing trading range may persist into the near term with next foreseeable catalyst for break-out the FOMC meeting next week.


The Oil Index

Oil had some support in early trading but profit takers and uncertainty among the bulls left prices in the red at settlement time. There are signs of near term shift in supply/demand balance but the extent is still unclear. Regardless, longer term fundamentals remain skewed to the supply side so any upside we see now will be limited. Now that WTI has confirmed support at/above $45 upside target is near $50. Once prices reach that level expect to see US rig counts and production begin to rise again.

The Oil Index tried to rise today but it too was capped by resistance. The index closed with a loss near -0.20% after rising about that high intraday. Resistance is the 1,120 support/resistance line that has been in play for over a year. The indicators are bullish and pointing higher so I would expect to see prices at least test resistance again, a break above which would indicate further upside.


In The News, Story Stocks and Earnings

Blackrock reported earnings before the bell and delivered a miss on the top and bottom line. Revenue grew year over year by 6.1% and only fell short of estimates by less than 1%, driven by increased traffic in lower cost passively managed funds. EPS grew by 10% but was not enough to satisfy the market. Shares of the stock fell by nearly -14%.


JBHunt also reported a miss. The intermodal trucking company delivered a high single digit increase in revenue for all segments but was not able to meet expectations. The company reports that volume growth and an increase in revenue producing trucks was offset by increases in costs. The news sent shares falling in the premarket session to open with losses near -2% but buyers stepped in to drive prices back up. Today's action created a large green bodied candle rising from the short term moving average and bullish for near term traders..


Netflix reported after the bell and set a high bar for the tech sector. The company reported above expectation increases in subscriber growth, revenue and EPS that more than pleased investors. The company also guided 3Q revenue and earnings above consensus. Shares of the stock rose more than 10% on the news to trade just shy of the all time high.


The Indices

Today's action wasn't bullish and it wasn't bearish, it was about as neutral as a day of trading can be. Aside from the Dow Jones Transportation Average the major indices posted nearly no movement for the day. The transports however fell nearly a half percent shedding -0.45%. The index created a small doji candle indicative of near term support but not a strong one. The indicators are a bit mixed showing bullishness in the longer term but consistent with a peak in the nearer. Support is a bit below today's close along the short term moving average, about 50 points lower, and may be reached if the index does begin to move lower. If not resistance may be found just above today's close at the current all time high.


The S&P 500 closed with no gain and no loss, 0.00%. The broad market created a small doji candle with no visible body and barely visible upper shadow touching resistance at the bottom of my up trend line. Today's action is far from definitive but may indicate a near term peak. The indicators are bullish and pointing higher although there are some red flags, stochastic is showing early signs of resistance and both are divergent from the new high. A fall from this level may find support along the short term moving average, a break above the trend line would be bullish and trend following.


The Dow Jones Industrial Average closed with a loss of -0.03% and also created a small doji like candle. The blue chips are struggling with resistance at my long term up trend line and may not be able to break it. The indicators are bullish and suggest it will be tested but they are still weak and showing divergence so a break to new highs is questionable. Resistance is 21,640, a break above which would be bullish and trend following. Support is near 21,367 and the short term moving average.


The NASDAQ Composite posted a gain of 0.03% and nearly set a new all time high. The tech heavy index toyed with new all time closing high today but just didn't have the wherewithal to do it. Today's candle is a very small doji like spinning top just below the current all time high and may indicate a peak. The indicators are a bit mixed but showing signs of resistance and the possibility of a peak, MACD is bullish and suggests resistance will be tested while stochastic has already begun to roll over. A break to new highs would be bullish and trend following. Failing to break to new highs may result in a pull back to firmer support with target near 6,200 and the short term moving average.


The near, short and long term trends are all bullish, last week's rally a trend following confirmation of the bull market. Today's action was cautious and rightly so, earnings season has just begun and there is still a lot that could go wrong. If the season isn't as good as expected, if forward outlook continue to decline, the chance for correction remains. I am bullish for the near term but still ever so cautious, waiting for the strong signals I know will come when the market is ready.

Until then, remember the trend!

Thomas Hughes


New Plays

Time for a Breakout?

by Jim Brown

Click here to email Jim Brown
Editor's Note

A shuffle in the C-Suite has produced renewed interest in this storage company. Shares are up sharply after an Apple exec was named COO.



NEW BULLISH Plays

BOX - Box Inc - Company Profile

Box, Inc. provides cloud content management platform that enables organizations of various sizes to manage their enterprise content from anywhere. The company's platform enables users to collaborate on content internally and with external parties, automate content-driven business processes, develop custom applications, and implement data protection, security, and compliance features. Box, Inc. offers its solution in 22 languages. It serves healthcare and life sciences, financial services, legal services, media and entertainment, retail, education, energy, and government industries primarily in the United States. The company was formerly known as Box.net, Inc. and changed its name to Box, Inc. in November 2011. Company description from FinViz.com.

Expected earnings August 30th.

Box is making a lot os smart moves lately. The recently partnered with Microsoft to jointly offer Box cloud management to Azure enterprise customers. Box will use Azure as a strategic public cloud platform and the companies have committed to share go-to-market investments, including initiatives to co-sell Box with Azure. Any time you can get Microsoft to partner with you, share the expenses and market your product, it was a good move.

Last week Box appointed Stephanie Carullo as the new COO. Carullo led U.S. sales for Apple's education business. Before that whe led the data center and virtualization architecture group at Cisco Systems. That is a good pedigree.

Shares have ticked up since both of those events last week and could be headed for a breakout over $19.50.

S&P futures are down -$3.50. DO NOT enter this position unless the market is positive. If the market opens down, wait for the S&P to turn positive before entering.

Buy BOX shares, currently $19.02, initial stop loss $17.85.
Alternate position: Buy Sept $20 call, currently 90 cents, no initial stop loss.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays



In Play Updates and Reviews

Russell Outperforms

by Jim Brown

Click here to email Jim Brown

Editors Note:

It was not a big move at 2.78 points, but it was more than any of the big cap indexes could manage. The Dow lost 8 points after trading in the smallest range since 2013 at 44 points. The Nasdaq gained 2 points and the S&P closed fractionally lower. Volume was low with everyone waiting to see if Friday's new highs were going to stick and for the earnings parade to begin.

There was no material movement on the vast majority of stocks but decliners had a slight edge as traders took profits ahead of the earnings. Netflix missed by a penny on earnings but blew away estimates for new subscribers. Shares were up 7% in afterhours but the Nasdaq futures are up only 1 point. It has not yet translated into a broader tech gain. Russell futures are up 3 points.





Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.


Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.





Current Position Changes


HZNP - Horizon Pharma
The long position was entered at the open.



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BULLISH Play Updates

ACOR - Acordia Therapeutics - Company Profile

Comments:

No specific news. Minor decline. It appears some resistance has formed at $20.85.

Original Trade Description: June 21st.

Acorda Therapeutics, Inc., a biopharmaceutical company, identifies, develops, and commercializes therapies for neurological disorders in the United States. The company markets Ampyra (dalfampridine), an oral drug to improve walking in patients with multiple sclerosis (MS); Zanaflex capsules and tablets for the management of spasticity; and Qutenza, a dermal patch for the management of neuropathic pain associated with post-herpetic neuralgia. It also markets Ampyra as Fampyra in Europe, Asia, and the Americas. In addition, the company develops CVT-301 that has completed a Phase III clinical trial for the treatment of OFF periods in Parkinson's disease; CVT-427, which has completed a Phase I clinical trial to treat migraine; Tozadenant that is in Phase III clinical trial for reduction of OFF time in Parkinson's disease; SYN120, which is in Phase II clinical trial to treat Parkinson's disease-related dementia; and BTT1023 (timolumab) that is in Phase II clinical trial for primary sclerosing cholangitis. Further, it develops rHIgM22, which is in Phase I clinical trial for the treatment of MS; Cimaglermin alfa that has completed a Phase I clinical trial in heart failure patients; and Chondroitinase Program that is in research stage for the treatment of spinal cord injury. The company has collaborations and license agreements with Biogen International GmbH; Alkermes plc; Rush-Presbyterian St. Luke's Medical Center; Alkermes, Inc.; SK Biopharmaceuticals Co., Ltd.; Astellas Pharma Europe Ltd.; Canadian Spinal Research Organization; Cambridge Enterprise Limited and King's College London; Mayo Foundation for Education and Research; Paion AG; Medarex, Inc.; and Brigham and Women's Hospital, Inc. Company description from FinViz.com.

Acordia took a fall at the end of March when two Multiple Sclerosis patents were invalidated by a court. This is normal stuff and happens all the time to biotech companies when competitors want to introduce a generic. Shares crashed but the outlook for Acordia did not.

They fell another 5% in late April when revenue of $112 million missed estimates for $121 million. The company did reaffirm guidance for ful lyear Ampyra sales in the range of $525-$545 million.

Recently, their experimental Parkinsons drug CVT-301 was named Inbrija. In early June they presented Phase III data which met its primary endpoint of improvement in motor function compared to a placebo. Multiple secondary endpoints were also met. The company plans to file a new drug application with the FDA by the end of this quarter.

Expected earnings July 27th.

Shares have been rebounding sharply and cleared resistance from the April/May decline. They have a long way to go to recover their highs and that is a potential for profit.

Position 6/22/17:

Long ACOR shares @ $18.80, see portfolio graphic for stop loss.



HZNP - Horizon Pharma - Company Profile

Comments:

No specific news. Minor 20 cent decline.

Original Trade Description: July 15th.

Horizon Pharma Public Limited Company, a biopharmaceutical company, engages in identifying, developing, acquiring, and commercializing medicines for the treatment of orphan diseases, arthritis, pain, and inflammation and inflammatory diseases in the United States and internationally. The company's marketed medicine portfolio consists of ACTIMMUNE for the treatment of chronic granulomatous disease and malignant osteopetrosis; RAVICTI and BUPHENYL/AMMONAPS to treat urea cycle disorders; PROCYSBI for the treatment of nephropathic cystinosis; QUINSAIR for the treatment of chronic pulmonary infections due to pseudomonas aeruginosa in cystic fibrosis patients; and KRYSTEXXA to treat chronic refractory gout. Its products also include RAYOS/LODOTRA for the treatment of rheumatoid arthritis, polymyalgia rheumatic, systemic lupus erythematosus, and multiple other indications; DUEXIS to treat signs and symptoms of osteoarthritis and rheumatoid arthritis; MIGERGOT for the treatment of vascular headache; PENNSAID 2% to treat pain of osteoarthritis of the knees; and VIMOVO for the treatment of signs and symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis. The company has collaboration agreements with Fox Chase Cancer Center to study ACTIMMUNE in combination with PD-1/PD-L1 inhibitors for use in the treatment of various forms of cancer; and Alliance for Lupus Research (ALR) to study the effect of RAYOS on the fatigue experienced by systemic lupus erythematosus (SLE) patients. Company description from FinViz.com.

Expected earnings August 7th.

Horizon posted and earnings disappointment in May that saw the stock collapse from $15.50 to $9.50. They reported earnings of 21 cents that missed estimates for 25 cents. Revenue was $220.9 million and missed estimates for $248 million. They guided for the full year for revenue of $1.0 to $1.03 billion. The problem was a shift in the contracting model with pharmacy benefit managers that was not performed in accordance with expectations.

That contracting problem has been solved. They also announced that three patents cases against Dr Reddy's, Lupin Ltd and Mylan Labs were upheld by a US District Court, which will prevent generics for VIMOVO until 2022 at the earliest.

Horizon is small company with numerous drugs in the pipeline and in trials. Shares are recovering from the May disaster and there is still $2.50 to gain to fill the gap from the post earnings crash.

Position 7/17: Alternate position:
Long Aug $14 call @ $.50, see portfolio graphic for stop loss.




BEARISH Play Updates

FRGI - Fiesta Restaurant Group - Company Profile

Comments:

No specific news. Shares only rebounded 20 cents from the 4-year low.

Original Trade Description: July 12th.

Fiesta Restaurant Group, Inc., through its subsidiaries, owns, operates, and franchises fast-casual restaurants. It operates its fast-casual restaurants under the Pollo Tropical and Taco Cabana brand names. The company's Pollo Tropical restaurants offer various Caribbean inspired food, and Taco Cabana restaurants offer a selection of Mexican food. As of January 1, 2017, it had 177 company-owned Pollo Tropical restaurants, 166 company-owned Taco Cabana restaurants, and 29 franchised Pollo Tropical restaurants in the United States, Puerto Rico, Panama, Trinidad & Tobago, Guatemala, the Bahamas, Venezuela, and Guyana, as well as 5 franchised Taco Cabana restaurants located in New Mexico, 2 non-traditional Taco Cabana licensed locations on college campuses in Texas, and 1 location in a hospital in Florida. Company description from FinViz.com.

Expected earnings August 7th.

On May 8th, Fiesta reported earnings of 25 cents compared to estimates for 30 cents. Revenue of $175.6 million missed estimates for $178.2 million. Same store sales declined -6.7% at Pollo Tropical and transactions declined -8.9%. Sales at Taco Cabana decreased 4.5% and sales transactions fell -4.0%. The company closed 30 stores that were losing money.

The company is under attack by JCP Investment Management, which has a 3% stake. JCP had lobied for changes to be voted at the June shareholder meeting. The company and JCP have been trading hostile press releases. The shareholder meeting went in favor of Fiesta but JCP is not giving up. Shares began to decline further when JCP did not gain control of the board.

Shares closed at a 4-year low on Wednesday at $18.80 and the IPO price in 2012 was $11. Shares had traded as high as $69. With the chain closing stores at a rapid pace, their long term future is in doubt.

Position 7/13/17:

Short FRGI shares @ $18.75, see portfolio graphic for stop loss.
Alternate position: Long September $17.50 put @ $1.05, see portfolio graphic for stop loss.



VXX - Volatility Index Futures - ETF Description

Comments:

Big drop despite the weak market. New closing low.

We are nearing the point where the ETF will do a 1:4 reverse split. That will be an excellent opportunity for us to get short again at a higher level.

Barron's is reporting current short interest at 59 million shares out of 66 million outstanding.

Original Trade Description: April 12th.

The VXX is a short-term volatility product based on the VIX futures. As a futures product it has the rollover curse. Every time they roll to a new futures contract, they have to pay a premium and that lowers the price of the ETF. It is a flawed product with a perpetual decline built in from the monthly roll over in the futures contracts.

As evidence of this flaw, they have now done four 1:4 reverse stock splits. The last four reverse splits occurred at $13.11 (11/2010), $8.77 (10/2012), $12.84 (11/2013), $9.52 (8/8/16). The prospectus says it can reverse split anytime it trades under $25 for a prolonged period and the splits will always be 1:4.

Unfortunately, put options are expensive with a volatility instrument at this price level. The only recommendation is to short the ETF and forget it. If we do get a prolonged rally as some are expecting we could see strong market gains in the next 2-3 months. This will be a long-term position. This is not a 2-3 week play. I can guarantee you, if history holds, we can play this until it splits 1:4 again at $10. Once we are in the position and profitable I will put a trailing stop loss on it. We will take profits and then look for a bounce to get back in.

We know from experience that the VXX always declines. The last time we shorted this ETF we had a $7.23 gain.

Position 4/13/17:

Short the VXX @ $17.98, no stop loss because it always declines eventually.





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